Financing Canadian Small Businesses (Part 2 – Financing sources in Canada: Lender based financing options)
| Oct. 17, 2011Comments 0
As an important part of Canada’s economy, small businesses have been the key part of driving its growth. In order to succeed – not only must you work hard, have experienced managers, but you also need access to growth capital that will help you expand. In Canada, there are quite a few ways to fund your small business from loans, credit lines, cash from family and alternative financing such as cash advances from companies such as us. Each business is different and depending on their business model, may require a mix of financing sources.
Borrowing Money
The basic rule in borrowing money is that you must pay it back. Now, this is usually with interest added at varying rates, depending on the institution that you borrow from. You are also provided with a timeline that you must pay back the debt, which can be negotiated. In order to mitigate their risk, the lender would analyze a few criteria such as:
- your business plan
- and your financial strength – understanding your company’s ability to pay back the loan
- your executive’s team experience
A lender’s exposure to risk is determined by market conditions, the type of business you run and the availability of collateral to secure the loan. You must remember, if a small business defaults on their payments of the loan, the lender has no recourse to obtain their payments back unless there is a secured asset.
Some lender-based financing options are:
Credit Cards – One of the quickest ways to finance your business is through the use of credit cards. Considered as a form of short-term financing, credit cards allow you to make small purchases for the short term and pay them off in future (usually within a specified amount of time). As long as you pay off your credit card on time, you incur no penalties. In many cases, the penalty is a high interest tacked on the amount loaned to you. There are credit cards designed specifically for small businesses – where they provide additional benefits that help the small business owner (such as air mile points, discounts etc.). They make it easier for business owners to provide a single location to track of expenses and daily spending
Credit Lines – The credit line acts as an operating loan, providing the business with funds to cover daily expenses. A financial institution will provide you with an operating line with a limit (depending on your company’s creditworthiness – and as funds are used, your credit line gets reduced. A credit line differs from a credit card as there is a lower interest rate and is secured by assets that a company has.
Leasing – A lease is not usually considered as a traditional form of financing and very different from a loan. It’s regarded as a long term rental of equipment or assets. And when the lease terminates, you have the option to buy it from the lessor at its residual value. The benefit of the lease is that it requires:
- Little or no money down,
- Is an alternative to purchasing capital goods such as cars, machinery or office equipment,
- Businesses are able to claim their monthly lease payments as a business expense.
Traditional Loans – A loan is normally used for large purchases, usually for a long term situation, such as capital expenditures or renovations. Labeled as term loans, they are mostly secured by an asset. Loans can be negotiated, especially on repayment schedules, rates and types of assets secured.
Supplier Credit (Net 30 or 60 terms) – Many businesses, especially distributors, resellers, wholesalers and manufacturers provide credit for their customers depending on their credit history. The most common version of credit is Net 30 or Net 60 terms, where the customer doesn’t have to pay for the goods received until after 30 to 60 days. Suppliers do reward clients who pay promptly, mostly in the form of discounts towards the amount owed.
The advantages of lender-based financing
Lender-based financing is a viable option for many small businesses because of the tax advantages that can affect the bottom line. When it comes to loans, Canadian tax laws allow you to write off the interest paid on loans. In the case of a business lease, especially in capital equipment, your business can deduct the full cost of the lease payments because it is being rented from the leasing firm. In certain cases, you can save more in taxes than the payments you make towards a lease, resulting in much needed capital being re-invested into your business.